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Great-West Lifeco headquarters is seen in Winnipeg in 2013.JOHN WOODS/The Canadian Press

Canadian insurer Great-West Lifeco Inc. is boosting its presence in the United States and broadening its retail wealth management with the US$1-billion purchase of Personal Capital Corp.

On Monday, Great-West’s subsidiary Empower Retirement agreed to acquire Personal Capital for an initial US$825-million, with the potential to add up to US$175-million if certain growth metrics are met. The upfront payment is expected to be funded with cash on hand and $500-million in debt financing.

Based in Denver, Empower Retirement administers US$656-billion in assets for more than 9.7 million investors enrolled in defined contribution pension plans. Upon closing the deal, Empower will combine its retirement services, which include 401(k) group benefit plans, with Personal Capital’s online financial planning capabilities to expand into the U.S. retail wealth management sector.

“When we looked at the millions of Empower customers, we knew there was a real opportunity to provide them with a more comprehensive picture of their overall financial situation,” Great-West chief executive Paul Mahon said in an interview with The Globe and Mail.

Mr. Mahon says he’s been tracking Personal Capital’s growth over the past couple of years and had several conversations during that time with the digital company’s executives.

“When they came on the market, we knew this was the target we needed in order to really grow our U.S. business,” Mr. Mahon said. “This will transform Empower from a retirement record keeper into a true retail wealth management business, which was always our vision.”

The transaction is expected to close in the second half of 2020 and allows Great-West to penetrate the “mass affluent” market in the U.S. where, typically, investors have assets spread across a number of banks and investment companies. Mass affluent clients usually have between $100,000 to $1-million in investable assets.

“The challenge for many of these investors in the U.S. is that they often don’t have access to financial advisers like they would here in Canada – they are lacking that face-to-face guidance,” Mr. Mahon adds.

Eight Capital analyst Steve Theriault says Monday’s deal is not the type of acquisition that investors in Canadian large cap financials are used to.

“The deal is being done at 8.2 times 2020E [estimated] revenue on a company that doesn’t look like it will be making money for several years,” Mr. Theriault wrote in a research note. “While we expect little enthusiasm to be reflected in [Great-West Life] shares near term, in our view, if well executed, GWO may come out on the other side with an Empower business that is much better positioned than it has been over the last several years.”

Started in 2008 as a financial technology startup, Personal Capital currently manages about US$13-billion in assets and has made significant growth in the hybrid advice segment – where investors want to conduct business online but have the ability to speak to a human financial adviser.

Unlike many of the fintech startups in the online or robo-adviser investing space in Canada, Personal Capital is “currently profitable” prior to new customer acquisition costs and is expected to reach “standalone profitability” over the next two years as it achieves scale, Empower CEO Edmund Murphy told analysts during a call on Monday.

At the same time, the transaction will see Great-West’s sister company IGM Financial Inc. sell its 24.8 per cent stake in Personal Capital, which it began acquiring with a purchase in 2016. IGM, which along with Great-West is owned by Power Corp. of Canada, made subsequent purchases of equity in Personal Capital in 2017 and 2019 for a total cost of US$144.8-million.

IGM expects its proceeds from the transaction to be US$176.6-million, with the potential for an additional US$24.6-million, subject to the close of the deal.

IGM did not participate in the negotiation for the sale of Personal Capital to Empower Retirement.

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